CHAPTER 12
Decentralization and Performance Evaluation
Summary of Questions by Objectivses and Bloom’s Taxonomy
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True-False Statements
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Multiple Choice Questions
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Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12-2
Challenge Exercises
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TRUE-FALSE STATEMENTS
1. In decentralized organizations, upper level corporate managers provide substantial
authority to subunits because they have the most expertise.
2. An advantage of decentralization is that subunit managers can respond more quickly to
changing circumstances.
3. Lack of goal incongruence is a problem in decentralized organizations.
4. In a decentralized organization, performance evaluations encourage managers to
behave as if their own personal goals are congruent with the goals of the company as a
whole.
5. Increased motivation of managers is an advantage of decentralization.
6. Evaluating the performance of a subunit is the same as evaluating the performance of
the subunit manager.
7. Responsibility accounting holds managers responsible for all direct and allocated costs
charged to their operational unit.
8. Managers of cost centers are evaluated in order to decide if a division should be
expanded, contracted, or changed.
9. A profit center is a subunit that has responsibility for controlling costs and revenues and
generating a return on assets invested in the subunit.
10. Most service departments, such as machine maintenance and computer services, are
considered cost centers.
11. An investment center manager is responsible for controllable revenues and costs, and
controllable investments.
12. Cost centers, profit centers, and investment centers are all responsible for controlling
costs in the respective subunit.
13. One of the primary tools for evaluating the performance of profit centers is residual
income.
14. A profit margin of 12 percent indicates that each dollar of assets invested generated 12
cents of profit.
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Chapter 12 Decentralization and Performance Evaluation
12-3
15. Return on investment can be improved by increasing net income or increasing the
assets invested.
16. One disadvantage of evaluating performance using return on investment is that assets
are measured at their market value.
17. If managers are evaluated using return on investment, they are often over aggressive of
accepting new investments because the investment will provide an increase in net
income.
18. One of the primary tools for evaluating the performance of investment centers is residual
income.
19. Managers who are evaluated favorably when profit is used as the performance measure
will most likely be evaluated favorably when return on investment is used as the
performance measure.
20. Managers tend to over invest when profit is used to evaluate them.
21. Managers tend to under invest when return on investment is used to evaluate them.
22. When residual income is calculated, an amount is subtracted to cover the profit that the
company believes should be earned by the assets invested in the subunit.
23. When performance evaluation is based on return on investment, managers will usually
accept projects that yield less than the required rate of return.
24. Using NOPAT as ‘income’ in the residual income model is appropriate because
managers do not control the choice of using debt versus equity financing for the assets
invested in their division.
25. Economic value added is calculated as the return on investment adjusted for accounting
distortions.
26. The four dimensions of performance that are considered in a balanced scorecard are
financial, customer, internal processes, and strategy.
27. A balanced scorecard is used to evaluate investment centers.
28. A strategy map is a diagram of relationships across the four dimensions of a balanced
scorecard.
*29. When an efficient market exists, the variable cost will generally be the best transfer
price.
*30. Transfer prices should represent the opportunity costs of the transferred item.
Material from the appendix to the chapter is marked with an asterisk (*).
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12-4
Answers to True-False
MULTIPLE CHOICE
31. Firms that grant substantial decision-making authority to the managers of subunits are
referred to as
A. residual organizations.
B. profit centers.
C. responsibility organizations.
D. decentralized organizations.
32. Which of the following determines the level of decentralization in a company?
A. The diversity of the company’s products
B. The number of levels of employees and management in the company
C. The extent of decision-making authority given to the subunit managers
D. The globalization of the company’s sales
33. Which of the following is not an advantage of decentralization of a company?
A. Subunit managers have better information.
B. Subunit managers will act to benefit the organization as a whole.
C. Subunit managers can respond quicker to changing circumstances.
D. Subunit managers receive training helpful to future transition into top-level
management positions.
34. Which of the following is an advantage of a decentralized organization?
A. Allows for duplication of activities
B. Enables managers to enhance goal incongruence
C. Provides excellent training for potential top-level executives
D. Allows only top-level managers to make all decisions
35. Which of the following is a disadvantage of a decentralized organization?
A. Managers’ goals are congruent with the goals of the company as a whole.
B. Some activities may be duplicated and incur unnecessary costs.
C. Managers with the highest authority may take inappropriate decisions.
D. Managers may take more time to respond to changing circumstances.
36. Goal congruence refers to the match between
A. locations of manufacturing plants and customers.
B. goals based on profits and those based on return on investment.
C. number of units produced and number of units sold.
D. goals of the individual managers and those of the company as a whole.
Chapter 12 Decentralization and Performance Evaluation
12-5
37. Companies evaluate performance of subunits and subunit managers in order to
A. identify successful operations.
B. influence the behavior of managers.
C. determine areas that need improvement.
D. All of these answer choices are correct.
38. The evaluation of a subunit should be separated from the evaluation of the subunit’s
manager because
A. a subunit always shows better performance.
B. an excellent manager may be doing the best job possible in a poor subunit.
C. poor performance by managers may cause subunits to perform poorly.
D. GAAP requires separate evaluations of managers and the respective subunits.
39. For what does responsibility accounting hold managers responsible?
A. All costs charged to a manager’s subunit
B. All costs charged to a manager’s subunit plus a share of company-wide fixed
costs
C. Only the costs that a manager can control
D. Only the costs that a manager have personally approved
40. If a company uses responsibility accounting, a shift supervisor in the Austin production
plant should be held responsible for
A. all costs associated with the Austin plant.
B. direct costs incurred on the supervisor’s shift.
C. a share of all of the company’s costs.
D. direct material, direct labor, and all manufacturing overhead incurred on the
supervisor’s shift.
41. A cost center
A. is responsible for generating profit.
B. should be evaluated using return on investment to best motivate managers.
C. places its managers responsible for all costs under their control.
D. requires a set of performance measures that are more complex than those for an
investment center.
42. A subunit that has responsibility for controlling costs, but does not have responsibility for
generating revenue is a(n)
A. investment center.
B. cost center.
C. profit center.
D. value added center.
43. Which of the following units of Walmart will most likely be a cost center?
A. A Walmart store in Dallas, Texas
B. The corporate payroll department
C. The pharmacy department
D. The optical department
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12-6
44. Most service departments, such as machine maintenance and janitorial services, are
examples of
A. investment centers.
B. profit centers.
C. cost centers.
D. transfer centers.
45. If responsibility centers are ranked in order of increasing responsibility, the ranking is
A. investment centers, cost centers, profit centers.
B. cost centers, investment centers, profit centers.
C. cost centers, profit centers, investment centers.
D. investment centers, profit centers, cost centers.
46. Which of the following is a characteristic of a profit center?
A. The center’s manager has control over revenues and costs.
B. The subunit has responsibility for generating revenues, controlling costs, and
generating a return on assets.
C. The subunit can be evaluated using residual income.
D. The subunit can be evaluated by comparing it to other investment centers.
47. A manager who has the ability to replace assets within his division, is in control of what
type of center?
A. Business center
B. Profit center
C. Cost center
D. Investment center
48. The Cadillac division of General Motors is considered
A. a profit center.
B. an investment center.
C. a cost center.
D. a center that will be evaluated on profit margin.
49. Which of the following is a responsibility that distinguishes an investment center
manager from a profit center manager?
A. Setting prices for products
B. Controlling costs
C. Generating revenues while controlling costs
D. Significantly influencing investment decisions
50. What does ROI measure?
A. The amount of profit generated out of each sales dollar
B. The amount of sales generated out of each dollar of assets invested
C. The amount of profit generated out of each dollar of assets invested
D. The amount of revenue generated out of each sales dollar
51. Return on investment is the ratio of
A. investment center income to invested capital.
B. sales to net income.
C. profit center revenues to assets invested.
D. profit center revenues to profit center expenses.
Chapter 12 Decentralization and Performance Evaluation
12-7
52. Return on investment is used to evaluate
A. profit centers.
B. cost centers.
C. investment centers.
D. revenue centers.
53. Why is return on investment better than income as a measure of performance for an
investment center?
A. The calculation for income is determined by GAAP, while return on investment is
adjusted to meet the needs of the company.
B. Return on investment is easier to calculate than income.
C. Return on investment considers the amount invested as well as the income.
D. Return on investment is forward looking, while income is backward looking.
54. Which of the following can improve a company’s return on investment?
I. Increase the profit margin
II. Decrease total assets
III. Decrease the contribution margin
A. I, II, and III
B. I and III
C. II and III
D. I and II
55. Profit margin is
A. the ratio of sales to income.
B. multiplied by investment turnover to calculate return on investment.
C. the amount of income earned on each dollar of assets invested.
D. All of these answer choices are correct.
56. The income amount that is used in the calculation of return on investment is usually
A. earnings before interest and taxes.
B. net income as defined by GAAP.
C. operating cash flows.
D. net operating profit after taxes.
57. NOPAT is
A. net income with costs removed that managers at the divisional level are unable
to control.
B. net income plus noncash flow amounts.
C. net income less the cost of financing.
D. net income minus noninterest-bearing current liabilities.
58. NOPAT does not hold the investment center manager responsible for
A. interest expense.
B. interest expense and noninterest-bearing current liabilities.
C. noninterest-bearing current liabilities.
D. assets invested in the division.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12-8
59. NOPAT is used for ‘income’ in the return on investment formula because
A. investment center managers should not be evaluated based on long-term
financing decisions since they do not have responsibility for making those
decisions.
B. NOPAT represents the return to stockholders, and divisions are free to issue
stock.
C. NOPAT represents the return to debt capital, and division managers generally
are free to issue debt needed to acquire new investments.
D. All of these answer choices are correct.
60. Which of the following consists of noninterest-bearing current liabilities?
A. Accrued income taxes and income taxes payable
B. Accounts receivable and accounts payable
C. Accounts payable and dividends declared
D. Wages payable and notes payable
61. It is difficult to compare investment centers using return on investment when there is a
significant difference in the _________ between the investment centers.
A. age of the assets
B. net operating profit after taxes
C. amount of noninterest-bearing current liabilities
D. market share
62. The 2017 income statement for the East Division of Procter Wells Company is as
follows:
Sales $1,800,000
Operating expenses 1,380,000
Net operating income 420,000
Interest expense 120,000
Earnings before taxes 300,000
Income tax expense (40%) 120,000
Net income $ 180,000
This division’s invested capital is $4,000,000. How much is the East Division’s return on
investment?
A. 6.3%
B. 5.7%
C. 10.5%
D. 7.5%
Chapter 12 Decentralization and Performance Evaluation
12-9
63. The income statement for the Commercial Construction Division of the Kenyon
Company is as follows:
Sales $272,000
Operating expenses 132,000
Net operating income 140,000
Interest expense 20,000
Earnings before taxes 120,000
Income tax expense (30%) 36,000
Net income $ 84,000
If this division’s invested capital is $500,000, how much is its return on investment?
A. 19.6%
B. 16.8%
C. 20.8%
D. 14.0%
64. South Division of Renato Enterprises reported net income of $480,000 in March on sales
of $7,900,000. If this division has no interest expense, an income tax rate of 30 percent,
and reported a return on investment of 12 percent, how much is invested capital?
A. $948,000
B. $4,000,000
C. $2,800,000
D. More information is needed to determine the answer.
65. West Division of PoolGuard has invested capital of $900,000. This division incurred
$80,000 in interest expense and $20,000 in income tax expense related to interest in
July. If this division reported a return on investment of 15 percent, how much is NOPAT?
A. $60,000
B. $75,000
C. $135,000
D. $195,000
66. Rail Star Company reported the following results for 2017:
Sales $6,000,000
Investment turnover 2.4
Return on investment 10%
Given this information, how much is the company’s invested capital?
A. $2,500,000
B. $1,440,000
C. $600,000
D. $1,440,000
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–10
67. The Florida Division of Garner Furniture reported the following results for 2017:
Invested capital $800,000
Profit margin 5%
Return on investment 8%
Given this information, how much was sales?
A. $1,280,000
B. $500,000
C. $1,600,000
D. $64,000
68. The 2017 income statement for the Clothing Division of Tom Ron Surf Company is as
follows:
Sales $445,000
Operating expenses 270,000
Net operating income 175,000
Interest expense 35,000
Earnings before taxes 140,000
Income tax expense (30%) 42,000
Net income $ 98,000
How much is net operating profit after taxes?
A. $108,500
B. $133,000
C. $73,500
D. $122,500
69. The Jersey Division of Yankee Products has invested capital of $1,400,000. This division
incurred $80,000 in interest expense and $140,000 in income tax expense in 2017. If
this division reported a return on investment of 14 percent, how much is net operating
profit after taxes?
A. $416,000
B. $196,000
C. $116,000
D. $276,000
70. Western Electric reported the following results for 2017:
Sales $8,400,000
Investment turnover 2.5
Return on investment 12%
Given this information, how much is the company’s NOPAT?
A. $1,008,000
B. $2,520,000
C. $403,200
D. $3,360,000
Chapter 12 Decentralization and Performance Evaluation
12–11
71. Canal Tower is a division of Sounder Products. For the most recent year, Canal Tower
had net income of $16,000,000. Included in income was interest expense of $1,200,000.
The operation’s tax rate is 40 percent. Total assets of Canal Tower are $225,000,000,
current liabilities are $40,000,000, of which $35,000,000 are noninterest-bearing. How
much is return on investment for Canal Tower?
A. 8.0%
B. 8.8%
C. 9.1%
D. 7.4%
72. Consider the following information for Haley and Morris, Inc.
December 31
2017 2018
Total assets $40,000,000 $50,000,000
Noninterest-bearing current liabilities 800,000 1,400,000
Net income 2,600,000 3,400,000
Interest expense 300,000 400,000
Tax rate 30% 30%
How much is the return on investment for 2018?
A. 7.57%
B. 7.24%
C. 6.42%
D. 7.82%
73. The manager of the Beach Division of Treat Time is evaluating the acquisition of a new
mobile ice cream server. The budgeted operating income of the Beach Division is
currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current
liabilities of $600,000. The proposed investment would add $18,000 to operating income
and would require an additional investment of $120,000. The targeted rate of return for
the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of
the Beach Division if the ice cream server is not purchased?
A. 15.0%
B. 10.5%
C. 10.2%
D. 9.73%
74. The manager of the Beach Division of Treat Time is evaluating the acquisition of a new
mobile ice cream server. The budgeted operating income of the Beach Division is
currently $2,940,000 with total assets of $28,600,000 and noninterest-bearing current
liabilities of $600,000. The proposed investment would add $18,000 to operating income
and would require an additional investment of $120,000. The targeted rate of return for
the Beach Division is 9 percent. Ignoring taxes, how much is the return on investment of
the Beach Division if the ice cream server is purchased?
A. 10.52%
B. 15.00%
C. 10.56%
D. 12.75%
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–12
75. The manager of the West Division of Beach Clothing Company is evaluating the
acquisition of a new embroidery machine. The budgeted operating income of the West
Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing
current liabilities of $1,000,000. The proposed investment would add $750,000 to
operating income and would require an additional investment of $3,500,000. The
targeted rate of return for the West Division is 14 percent and the cost of capital is 9
percent. Ignoring taxes, how much is the residual income of the West division if the
embroidery machine is not purchased?
A. $202,000
B. $1,930,000
C. $2,110,000
D. $1,060,000
76. The manager of the West Division of Beach Clothing Company is evaluating the
acquisition of a new embroidery machine. The budgeted operating income of the West
Division was $4,000,000 with total assets of $22,000,000 and noninterest-bearing
current liabilities of $1,000,000. The proposed investment would add $750,000 to
operating income and would require an additional investment of $3,500,000. The
targeted rate of return for the West Division is 14 percent and the cost of capital is 9
percent. Ignoring taxes, how much is the residual income of the West division if the
embroidery machine is purchased?
A. $2,545,000
B. $1,320,000
C. $2,860,000
D. $4,456,000
77. If a manager is evaluated using the return on investment, the manager may be reluctant
to invest in new equipment because the additional investment
A. may reduce profit by the cost of the investment.
B. will decrease the level of assets.
C. may decrease the return on investment.
D. may increase investment turnover.
78. Which of the following statements is true?
I. Managers have a tendency to overinvest when return on investment is used
as a performance measure.
II. Managers have a tendency to underinvest when profit is used as a
performance measure.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Chapter 12 Decentralization and Performance Evaluation
12–13
79. A manager is evaluated based on return on investment. The corporate minimum
required return is 11 percent and the manager runs a division that has attained a 14
percent return on investment. Which of the following statements is true?
A. The manager will most likely not invest in a project that has a return on
investment of 13 percent.
B. The manager will invest in all projects that increase operating income.
C. The manager will not consider projects that exceed 14 percent.
D. The manager may prefer to invest in projects that have a return on investment
that is very close 11 percent to stay in line with corporate expectations.
80. An adjustment is made to net income when calculating residual income to remove
A. noninterest-bearing current liabilities.
B. interest and the related tax effect.
C. financing costs that the manager is able to control.
D. accounting distortions.
81. Evaluating segments based on the segment’s return on investment will
A. encourage each segment’s manager to select only projects that are above the
company’s current return on investment.
B. encourage each segment’s manager to only select projects that are above the
individual segment’s current return on investment.
C. encourage each segment’s manager to select only projects below the company’s
required rate of return.
D. encourage managers to select only projects below the segment’s cost of capital.
82. Economic value added is
A. essentially the same as residual income except that adjustments are made to
liabilities and assets to eliminate “accounting distortions” caused by interest
expense.
B. essentially the same as residual income except that adjustments are made to
income and assets to eliminate “accounting distortions” that arise from following
generally accepted accounting principles.
C. the use of qualitative and quantitative measures to evaluate performance.
D. essentially the same as residual income except that adjustments are made to
income and assets to eliminate “accounting distortions” caused by noninterest-
bearing current liabilities.
83. Economic value added is residual income adjusted for
A. noninterest-bearing current liabilities.
B. interest and the related tax effect.
C. financing costs that the manager is unable to control.
D. accounting distortions.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–14
84. The following data pertains to the Retail Division of Motor Express:
Sales $700,000
Invested capital 200,000
Net operating profit after taxes 49,000
Noninterest-bearing current liabilities 20,000
The minimum rate of return specified by Motor Express is 12 percent and the cost of
capital is 8 percent. How much is residual income?
A. $33,000
B. $25,000
C. $27,400
D. $34,600
85. The Produce Division of Saveway Shop had invested capital of $520,000 last year with
$20,000 of noninterest-bearing current liabilities. If the minimum required rate of return is
9 percent, the cost of capital is 7 percent, and last year’s residual income was $52,000,
how much was last year’s NOPAT?
A. $98,800
B. $15,600
C. $88,400
D. $5,200
86. The Global Division of Station Depot has invested capital of $920,000. If residual income
is $4,600 and net operating profit after taxes is $69,000, how much is the cost of capital?
A. 7.00%
B. 6.67%
C. 7.50%
D. 8.00%
87. Doral Division of Resorts International reported net operating profit after taxes totaling
$120,000 in 2017. The cost of capital is 10.5 percent and the invested capital is
$560,000. R&D incurred in 2017 was $100,000. The company’s policy is to amortize
intangible assets over 4 years. The income tax rate is 30 percent. How much is the
company’s economic value added for 2017?
A. $105,825
B. $825
C. $70,825
D. $75,825
88. Marine Division of Sando Company reported net operating profit after taxes of $27,000
in 2017. The cost of capital was 14 percent and the invested capital was $150,000.
Current year R&D expense is $80,000. If R&D had been capitalized, amortization would
have been $20,000 for 2017. The income tax rate is 30 percent. How much is adjusted
NOPAT to be used in calculating EVA for 2017?
A. $45,000
B. $41,000
C. ($15,000)
D. $69,000
Chapter 12 Decentralization and Performance Evaluation
12–15
89. Global Division of Food National Distribution’s economic value added for 2017 was
$1,600. The company’s cost of capital for the year was 16 percent and the company’s
adjusted net operating profit after taxes (NOPAT) was $3,500. How much is the amount
of the Global Division’s invested capital after adjustment for accounting distortions when
calculating EVA?
A. $31,875
B. $21,875
C. $11,875
D. $41,875
90. The following data pertains to the Electronics Division of the Maxwell & Ashley
Company:
Sales $1,000,000
Invested capital $700,000
Noninterest-bearing current liabilities $80,000
Net operating profit after taxes $82,000
Minimum required rate of return 9%
Cost of capital 7%
How much is residual income for the Electronics Division?
A. $19,000
B. $33,000
C. $26,200
D. $38,600
91. The Produce Division of Nature Green has invested capital of $940,000 and noninterest–
bearing current liabilities totaling $20,000. If the minimum required return is 11 percent,
cost of capital is 9 percent, and residual income is $12,000, how much is NOPAT?
A. $113,200
B. $115,400
C. $94,800
D. $96,600
92. Consider the following information for the Executive Division of Buy Electronics:
December 31
2018 2017
Total assets $11,800,000 $11,000,000
Noninterest-bearing current liabilities 500,000 520,000
Net income 700,000 800,000
Interest expense 210,000 300,000
Income tax rate 35% 35%
Cost of capital 7% 8%
Required rate of return 9% 11%
How much is residual income for 2018?
A. $45,500
B. ($180,500)
C. $119,000
D. ($227,500)
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–16
93. The following income statements for the year ending December 31 and other information
are available for the Langston Division of Act Company:
For the Year Ending December 31
2018 2017
Sales $250,000,000 $220,000,000
Cost of goods sold 105,000,000 96,000,000
Gross margin 145,000,000 124,000,000
Selling and administrative costs 25,000,000 22,500,000
Research and development 15,600,000 12,400,000
Income from operations 104,400,000 89,100,000
Less taxes on income 31,320,000 26,730,000
Net income $ 73,080,000 $ 62,370,000
Total assets $650,000,000 $605,000,000
Noninterest-bearing current liabilities $15,000,000 $12,300,000
Required rate of return 12% 12%
Cost of capital 10% 10%
Interest expense is $0 and the tax rate is 30 percent. Langston Division amortizes
intangible costs over 4 years. By how much is invested capital adjusted as it relates to
computing EVA for 2018?
A. $17,900,000
B. $11,700,000
C. $6,020,000
D. $8,600,000
94. The following income statements for the year ending December 31 and other information
are available for the Langston Division of Act Company:
For the Year Ending December 31
2018 2017
Sales $250,000,000 $220,000,000
Cost of goods sold 105,000,000 96,000,000
Gross margin 145,000,000 124,000,000
Selling and administrative costs 25,000,000 22,500,000
Research and development 15,600,000 12,400,000
Income from operations 104,400,000 89,100,000
Less taxes on income 31,320,000 26,730,000
Net income $ 73,080,000 $ 62,370,000
Total assets $650,000,000 $605,000,000
Noninterest-bearing current liabilities $15,000,000 $12,300,000
Required rate of return 12% 12%
Cost of capital 10% 10%
Interest expense is $0 and the tax rate is 30 percent. Langston Division amortizes
intangible costs over 4 years. By how much is NOPAT adjusted as it relates to
computing EVA for 2018?
A. $8,190,000
B. $11,700,000
C. $8,600,000
D. $6,020,000
Chapter 12 Decentralization and Performance Evaluation
12–17
95. Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles
paper. Information related to the two subsidiaries follows.
Yard Recycling Paper Recycling
Total assets $8,000,000 $15,000,000
Noninterest-bearing current liabilities 500,000 1,000,000
Net income 1,500,000 2,600,000
Interest expense 600,000 800,000
Required rate of return 8% 11%
Cost of capital 7% 9%
Tax rate 30% 32%
How much is the return on investment for the Paper Recycling Division?
A. 19.65%
B. 20.40%
C. 22.46%
D. 14.69%
96. Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles
paper. Information related to the two subsidiaries follows.
Yard Recycling Paper Recycling
Total assets $8,000,000 $15,000,000
Noninterest-bearing current liabilities 500,000 1,000,000
Net income 1,500,000 2,600,000
Interest expense 600,000 800,000
Required rate of return 8% 11%
Cost of capital 7% 9%
Income tax rate 30% 32%
Which subsidiary has added the most to shareholder value in the last year?
A. Yard recycling, because it has a higher return on investment
B. Paper recycling, because it has a higher residual income
C. Both contributed equally in different ways
D. More information is needed to determine the answer
97. Pegasus Recycling has a subsidiary that recycles yard waste and another that recycles
paper. Information related to the two subsidiaries follows.
Yard Recycling Paper Recycling
Total assets $8,000,000 $15,000,000
Noninterest-bearing current liabilities 500,000 1,000,000
Net income 1,500,000 2,600,000
Interest expense 600,000 800,000
Required rate of return 8% 11%
Cost of capital 7% 9%
Tax rate 30% 32%
Based on the limited information, which subsidiary is the best candidate for expansion?
A. Yard recycling, because it has a higher return on investment
B. Paper recycling, because it has a higher residual income
C. Both contributed equally in different ways
D. More information is needed to determine the answer
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–18
98. Which dimension of a balanced scorecard is a measure of the increase in employee
training?
A. Learning and growth dimension
B. Internal processes dimension
C. The customer dimension
D. The financial dimension
99. In which dimension of a balanced scorecard is the measure of the number of new
patents developed through research and development?
A. Learning and growth dimension
B. Internal processes dimension
C. The customer dimension
D. The financial dimension
100. Which of the following is not one of the set of dimensions considered in the balanced
scorecard?
A. Customer
B. Internal processes
C. Competition
D. Learning and growth
101. Which of the following performance measures is considered the most sophisticated and
is felt to give top management the most comprehensive method of evaluating subunits?
A. Balanced scorecard
B. Return on investment
C. Economic value added
D. Net income
102. In what manner does the balanced scorecard challenge managers?
I. To focus on the single most important measure to the company
II. To perform on a variety of dimensions simultaneously
III. To look forward as well as backward
A. I and II
B. II and III
C. I and III
D. I, II, and III
*103. A transfer price is the price that is used to value transfers of goods and services
A. from one subunit of a company to another subunit in the company.
B. from a subunit of a company to another company in the same industry.
C. from a subunit of the company to a wholesaler or retailer.
D. back to one of the company’s suppliers.
*104. Which one of the following is not an acceptable base for determining the transfer price?
A. Market prices
B. Variable costs
C. Full cost plus profit
D. Fixed cost
Chapter 12 Decentralization and Performance Evaluation
12–19
*105. Which of the following transfer prices will likely be closest to the opportunity cost of the
product?
A. Variable costs less costs avoided on an internal transfer
B. Market price less costs avoided on an internal transfer
C. Variable cost
D. Full cost plus profit
*106. Sorenson Products has two divisions: a kitchen wares division that manufactures
ceramic dishes and a ceramic resin division that manufactures the resin used in creating
ceramic products. All ceramic used by the kitchen wares division is supplied by the
ceramic resin division, which also supplies resin to outside companies. What is the best
transfer price for the resin, assuming that the resin division is operating at only 70
percent of capacity?
A. An amount that equates to the variable costs plus the contribution margin of the
resin
B. An amount that equates to the market price of the resin
C. An amount that equates to the incremental cost of the resin
D. An amount that equates to the full cost of the resin
*107. When making a decision that involves a product transferred from another subunit of the
company, the manager of the selling division should choose the alternative that
A. maximizes the profit of his subunit.
B. requires a negotiated transfer price.
C. minimizes the goods needed from another subunit of the company.
D. maximizes profit for the company as a whole.
*108. Which of the following is an incentive for managers who must deal with different tax
rates in international markets?
A. Choose high transfer prices when goods are transferred to profit centers in a
country with a low tax rate.
B. Choose high transfer prices when goods are transferred to profit centers in a
country with a high tax rate.
C. Choose low transfer prices when goods are transferred to profit centers in a
country with a high tax rate.
D. Avoid transferring goods to foreign countries to avoid tariffs.
*109. Which of the following methods of setting a transfer price most closely reflects an arm’s–
length, independent transaction?
A. Full-cost price
B. Variable cost
C. Market price
D. Full-cost plus profit
*110. Which of the following is a disadvantage of using a negotiated transfer price instead of a
cost-based transfer price?
A. It reflects underlying opportunity costs associated with producing goods.
B. It encourages managers to sell products for less than variable costs.
C. It will allow one division to generate a large contribution margin and the other to
generate no contribution margin.
D. The transfer price may reflect negotiating skills of subunit managers.
Test Bank to accompany Jiambalvo Managerial Accounting, 6th Edition
12–20
*111. Merlin Component’s Hillside Division is currently operating at 100 percent capacity
(capacity is 100,000 units). The normal selling price for its wrap film is $12 per case. At
current operating levels, fixed costs are $3 per case and variable costs are $7 per case.
Another division of Merlin Components would like to buy from the Hillside Division. If this
sale is made, $1.20 per case in variable selling and administrative costs can be saved.
Calculate the most acceptable transfer price per unit.
A. $10.80
B. $12.00
C. $7.00
D. $5.80
*112. The Grain Division of Goodness Grains produces oat grain with the following
characteristics:
Capacity in bushels 90,000
Selling price per bushel $22
Variable cost per bushel $10
Fixed cost per bushel $4
The Cereal Division within the same company would like to buy the oat grain from the
Grain Division. It is now purchasing its oat grain from an outside supplier for $20 per
bushel. If the Grain Division sells to the Cereal Division, $3 in variable costs can be
avoided. The Grain Division is currently operating at capacity and selling all production
outside the company. If the Grain Division decides to sell to the Cereal Division, what is
the minimum transfer price per bushel?
A. $20
B. $19
C. $15
D. $22
*113. The West Division produces a part with the following characteristics:
Capacity (units) 20,000
Selling price per unit $33
Variable cost per unit $18
Fixed cost per unit $4
East Division within the same company would like to buy this part from the West
Division. The East Division is currently purchasing the part from an outside supplier for
$40 per unit. If the West Division sells to the East Division, $5 in variable costs can be
avoided. Suppose that the West Division has enough capacity to handle the demand
from the East division with no change in fixed costs. From the West Division’s
perspective, what is the minimum sales transfer price that West division should charge
to the East Division?
A. $14
B. $28
C. $18
D. $13